The San Diego Area Housing and Finance Agency has settled a tax dispute with the Internal Revenue Service over $82 million of "lease-to-own" bonds issued in 2001, according to a municipal disclosure notice the agency issued late Thursday.
The notice did not disclose the terms of the settlement, which usually involves a payment made to the IRS in exchange for protection of the tax-exempt status of the bonds. Under the settlement, the bonds remain tax-exempt.
The settlement is the latest development in what has been a far-reaching and lengthy IRS examination of more than $1 billion of this type of bonds in 21 transactions. The lease-to-own deals have spurred allegations of bid-rigging, arbitrage problems, and other violations of the tax laws and rules.
The deals were done by 21 issuers between 1996 and 2005 and are believed to be part of the Justice Department's criminal investigation into anticompetitive practices in the municipal investment and derivatives business.
That probe spurred two class action suits to be filed against 37 banks, brokers, insurance companies, and investment advisory firms in March. Among others, the suits name Societe Generale, a French investment bank with several branches in the U.S., and CDR Financial Products Inc., an investment advisory firm in Beverly Hills, as defendants. The 21 lease-to-own deals involving the two firms were cited in the suits as evidence "of bid-rigging and kickbacks that exist."
"There is evidence of quarterly payments [that] Societe Generale made to ... CDR for 'unspecified services' relating to these lease-to-own deals," the complaints state.
SocGen served as forward purchaser, liquidity provider, and investment agreement provider in the San Diego deal. Chambers Dunhill Rubin & Co., now CDR, structured the transaction.
Bradley S. Waterman, the tax controversy attorney representing the agency before the IRS, declined to comment on the notice Friday.
The two transactions involved in the examination were a $75 million of a Series 2001 A variable-rate lease purchase revenue bonds and $7.6 million of Series B subordinated variable-rate lease purchase bonds. None of the bonds are still outstanding, according to the notice.
The IRS began an audit of the bonds in 2005, and the agency received a preliminary adverse determination that the bonds were taxable on Dec. 28, 2006.
Representatives of the San Diego agency then requested a conference with the IRS tax-exempt bond office, and eventually agreed to negotiate a closing agreement with the IRS.
Chilton & Associates and Sutro & Co. were co-managers on the deal, with Sutro also serving as remarketing agent. Best Best & Krieger LLP of Riverside, Calif., was special counsel - issuing an unqualified opinion that the interest on the bonds was tax-exempt - and Jones Hall PC of San Francisco, and Nossaman, Gunther, Knox & Elliott LLP of Sacramento, now Nossaman LLP, were co-counsel to the underwriters. Greenberg Traurig LLP of Philadelphia served as SocGen's counsel.
In December of last year, Virginia's Harrisonburg Redevelopment and Housing Authority settled a similar tax dispute with the IRS over $83.3 million of its own lease-to-own bonds issued in 1999. In May of that year, California's Riverside-San Bernardino Housing and Finance Agency settled another audit of a lease-to-own deal, this time involving $71.7 million of its bonds, which it issued in 2001.
SocGen and CDR played similar roles in those transactions.
